A seller carryback note is a promissory note that the buyer of a property gives to the seller for part of the purchase price. The seller receives that part as a loan in place of cash at closing, “carries it back”, and is repaid in installments with interest.
Where the name comes from
In an ordinary sale, the buyer brings cash and a bank loan and the seller leaves closing fully paid. In a carryback, some or all of the price is left unpaid and the seller takes paper for it, carrying that part of the price back out of the closing as a note.
The same thing goes by other names: seller financing, owner financing, a purchase-money note, or simply “carrying paper”. The person holding the note is the note holder, and the person making the payments is the payer or borrower.
What the paperwork looks like
A promissory note sets the amount, the interest rate, the monthly payment and the payoff date. Alongside it, a mortgage or deed of trust secures the note with the property, giving the seller a lien, a legal claim that can be enforced if the payer defaults.
Carrybacks also arise in business sales, where the note may be secured by the business assets, by a personal guarantee from the buyer, or by nothing at all. “Carryback” describes how a note came about, so it overlaps with the other note types: a carryback can be a first or a second, on a house, on land or on a business.
Whole balance or just the gap
| Seller finances the whole balance | Seller finances the gap | |
|---|---|---|
| Bank loan involved | No | Yes, for most of the price |
| Seller’s lien position | First | Second, behind the bank |
| Size of the note | Price minus down payment | The part the bank and down payment did not cover |
| If the property is foreclosed | Seller is repaid first | Bank is repaid first |
Lien position is the order in which lenders are repaid if the property has to be sold, and a first-lien note is the stronger place to be. As an example, on a $200,000 sale with $20,000 down, a seller who finances everything else holds a $180,000 first. If a bank lends $150,000 of that, the seller’s carryback is a $30,000 second.
Why a seller carries a note
The plainest reason is to make a sale happen when the buyer could not get a bank loan, or not a large enough one, or the property did not fit a bank’s rules. Some sellers want the interest, which the note pays at the agreed rate for as long as it runs. Others want the price spread over several years, which can change how the gain is taxed; that depends on your situation and is a question for a CPA.
What holding one involves
Holding the note makes you the lender, with a monthly income and the lender’s risks. The payer may pay late or stop. You have to track payments and confirm that property taxes and insurance are kept up, and there may be year-end reporting that your CPA can explain. Your money stays tied up until the note is paid off.
For a holder who values steady income with a property behind it, that is a fair trade. For one who would prefer the cash some years in, the note can be sold.
Selling a carryback, or part of one
A note buyer pays a lump sum and takes over the right to the payments. The price is below the balance owed, and how far below depends on the rate, the payments left, the payer’s record, the equity in the property and your lien position. A carryback written at a low rate to help the sale along sells further below its balance than one written closer to what buyers want to earn. Know whether yours is a first or a second before you ask what the note would sell for, because that one fact shapes every offer.
On a note with a steady record you may be able to sell only the nearer payments, which raises cash and returns the note to you later. If you do not need the money now, keeping the note can be the better choice. The papers to gather before selling a seller carryback note are the closing statement, the recorded mortgage or deed of trust and your payment records.
Find out which kind you hold
Your closing statement shows whether a bank funded part of the buyer’s purchase, and so whether your note is a first or a second. If the statement is lost, the title or escrow company that handled the closing may still have a copy, and the county records will show any other loan recorded against the property at the time.
Related questions
Is a seller carryback the same as owner financing?
Yes, in everyday use. Owner financing and seller financing describe the arrangement. Carryback describes the note the seller ends up holding. Some people reserve carryback for a second-position note behind a bank loan.
Is a carryback note always secured by the property?
It should be, through a recorded mortgage or deed of trust, but not every deal was papered that way. If you are unsure, a title company can check whether your lien was recorded.
Can I sell a carryback note soon after the sale?
It is possible, though buyers generally pay more once the payer has a record of on-time payments. A note with very little history relies more heavily on the down payment and the payer's credit.